By Nick Cunningham
Posted on Wed, 13 January 2016 22:53 | 0
Low crude oil prices since the second half of 2014 have created a boon for consumers as the cost to fill up at the pump has plunged. The extra cash in the pockets of millions of motorists is often likened to an unexpected tax cut, which could help stimulate the economy.
Leaving aside the true extent of such a stimulus, which is debatable, there is a flip side to that coin. The collapse in crude oil prices is a huge blow to areas where oil extraction and associated industries are the bread and butter of the economy.
As petro-economies suffer from the bust in crude prices, the effects are showing up in the housing market.
Take North Dakota, for example, which was on the front lines of the oil boom between 2011 and 2014. In fact, North Dakota is probably the most vulnerable to a downturn in housing because of low oil prices. The economy is smaller and thus more dependent on the oil boom than other places, such as Texas. The state saw an influx of new workers over the past few years, looking for work in in the prolific Bakken Shale. A housing shortage quickly emerged, pushing up prices. With the inability to house all of the new people, rent spiked, as did hotel rates. The overflow led to a proliferation of “man camps.
Now the boom has reversed. The state’s rig count is down to 53 as of January 13, about one-third of the level from one year ago. Drilling is quickly drying up and production is falling. “The jobs are leaving, and if an area gets depopulated, they can’t take the houses with them and that’s dangerous for the housing market,” Ralph DeFranco, senior director of risk analytics and pricing at Arch Mortgage Insurance Company, told CNN Money.

New home sales were down by 6.3 percent in North Dakota between January and October of 2015 compared to a year earlier. Housing prices have not crashed yet, but there tends to be a bit of a lag with housing prices. JP Ackerman of HouseCanary says that it typically takes 15 to 24 months before house prices start to show the negative effects of an oil downturn.

According to Arch Mortgage, homes in North Dakota are probably 20 percent overvalued at this point. They also estimate that the state has a 46 percent chance that house prices will decline over the next two years. But that is probably understating the risk since oil prices are not expected to rebound through most of 2016. Moreover, with some permanent damage to the balance sheets of U.S. shale companies, drilling won’t spring back to life immediately upon a rebound in oil prices.

There are some other states that are also at risk of a hit to their housing markets, including Wyoming, West Virginia and Alaska. Out of those three, only Alaska is a significant oil producer, but it is in the midst of a budget crisis because of the twin threats of falling production and rock bottom prices. Alaska’s oil fields are mature, and have been in decline for years. With a massive hole blown through the state’s budget, the Governor has floated the idea of instituting an income tax, a once unthinkable idea.

The downturn in Wyoming and West Virginia has more to do with the collapse in natural gas prices, which continues to hollow out their coal industries. Coal prices have plummeted in recent years, and coal production is now at its lowest level since the Reagan administration. Shale gas production, particularly in West Virginia, partially offsets the decline, but won’t be enough to come to the state’s rescue.

Texas is another place to keep an eye on. However, Arch Mortgage says the economy there is much larger and more diversified than other states, and also better equipped to handle the downturn than it was back in the 1980s during the last oil bust.

But Texas won’t escape unscathed. The Dallas Fed says job growth will turn negative in a few months if oil prices don’t move back to $40 or $50 per barrel. Texas is expected to see an additional 161,200 jobs this year if oil prices move back up into that range. But while that could be the best-case scenario, it would still only amount to one-third of the jobs created in 2014. “The biggest risk to the forecast is if oil prices are in the range of $20 to $30 for much of the year,” Keith Phillips, Dallas Fed Senior Economist, said in a written statement. “Then I expect job growth to slip into negative territory as Houston gets hit much harder and greater problems emerge in the financial sector.”

After 41 consecutive months of increases in house prices in Houston, prices started to decline in third quarter of 2015. In Odessa, TX, near the Permian Basin, home sales declined by 10.6 percent between January and October 2015 compared to a year earlier.

Most Americans will still welcome low prices at the pump. But in the oil boom towns of yesterday, the slowdown is very much being felt.

The Consumer Financial Protection Bureau this week issued final changes to its mortgage rules, enabling responsible lending by small creditors, especially those operating in rural and underserved areas.

The new language – proposed in January – aims to increase the number of financial institutions, such as community banks and credit unions, able to offer certain types of mortgages in rural and underserved areas. It also gives small creditors time to adjust their business practices to comply with the rules.

Among the industry-supported provisions is a revised small-creditor definition. The final rule expands the designation to include banks that make fewer than 2,000 loans annually. Previously, the cutoff was 500. Loans held in portfolio – in which community banks retain 100 percent of the credit risk and a direct stake in the loan’s performance – will not count toward the loan total.

Also, industry supporters believe the changes will enable more community banks operating in rural areas to meet the unique mortgage needs of homeowners by deeming portfolio balloon mortgage loans they make to be qualified mortgages under the CFPB’s ability-to-repay rule.

LANDLORD PROBLEMS

Traditional investors hold their real estate as rental properties.

Most are tired of dealing with tenants and toilets. Dirty tenants can be landlord’s nightmare, and ……. They are very expensive! They can bring down the real and perceived value of your rental property. Unclean living conditions will not only damage the property, but they will attract bugs and rodents, and ultimately make it very difficult to re-rent.

The new Dodd-Frank/Safe Act is creating some many new variables in the Note World. At the same time it is creating some new opportunities resulting in an abundance of newly created seller paper. It is still unclear how it will be enforced or litigated, but to be sure it has dictated specific guidelines on how a note should be created.

The 10 things to consider when creating a note:

1. Have licensed loan officer under writes the paper (typically $500) just like would be done as if it was a traditional loan. Items to consider:

a. Current or reasonably expected income and assets (not the property of the loan
b. Current employment
c. Monthly mortgage payment (highest rate and amortization)
d. Monthly payments on all other mortgages
e. Monthly payments for housing costs (taxes, insurance, HOA, flood, condo fees)
f. Debts for alimony and child support
g. DTI or residual income
h. Credit history

2. Lender originates a Qualified Mortgage (QM) as defined:

a. Periodic paymentsb. No negative amortization, no interest only, no balloon, 30 year amortizationc. No fees greater than 3% (assumes $100,000 loan)d. ARMs (must be fixed for 5 years before adjusting)e. Verify credit, income and debtsf. Maximum DTI of 43%

3. Have the note serviced by a accredited servicing company. The $18/month fee can be passed on to the buyer.

4. Other considerations:

a. Not a “creditor” if they finance less than 6 residential mortgages in a calendar year or more than 1 high cost mortgage (exceed APOR by 6.5%).
b. One Property Exemption (within 12 months) Only available to
c. Persons, Estates or Trusts.

1. Must own the property
2. Did not build or act as a contractor for the residence of the property in normal course of business.
3. No negative amortization and have a fixed rate for at least 5 years with ARMS having reasonable annual and lifetime limits.
4. Must be fully amortizing
5. Must determine in good faith that the consumer has the ability to repay

One may ask why seller carry back? Bottom line it opens up more opportunities for the seller. The Dodd-Frank bill has established tighter underwriting guidelines, therefore disqualifying some potential good buyers. Due to the recent economic issues, they may have a marginal credit report, but they have good paying jobs and a large amount of cash for a substantial down payment. This in itself creates opportunity. The seller on the other hand can list and expect to sell their home for 15% above market without the issues of a low appraisal or potential repair requirements as is the case many times with FHA or VA financing. With the Phoenix market now a buyer’s market, Days on Market are increasing. This process will attract a larger pool of buyers and the seller can expect to sell their property faster than the normal retail sale. When closed they will be creating a cash flow well above normal CD rates with a well collateralized asset. Later after six months of seasoning, the seller can market the note to a note broker or private individual, discounting the note 10-15% and become whole. The note buyer will then have a very strong 10% plus return investment. Or… the seller could sell a partial (the first sixty months of payments) and receive a good portion of the principle.

However, it is imperative that the seller follow the Dodd-Frank guidelines noted above if they have any plans at all to sell the note.

Overall, seller carry is a tremendous opportunity for both property owners and real estate listing agents to market for property listings giving the property owner a real measurable benefit.

Ready to sell mortgage notes?

Protect yourself with outside closings!

When an investor has performed their research and is ready to purchase a private mortgage note they will ask the seller to deliver original documents (note, recorded mortgage, etc.) and sign the transfer package.

The Note Buyer

The note buyer will want these original documents before the funds are released to the seller.

The Mortgage Note Seller

A note seller may understandably wonder,

“How do I know I will ever receive my money once I turn over the documents establishing ownership?”

The Note Buying Challenge

So the note buyer wants the documents before the money is released and the seller wants the money before the documents are released.

The Solution

Using an outside closing through a title company, attorney, or escrow company easily solves this impasse. The outside closer will act as an independent third party (or fiduciary) protecting the interests of both parties.

An outside closing is basically an exchange of money for documents. The outside closer will receive the proceeds from the investor into their trust account and also receive the documents from the seller. It is not necessary for either the investor or the seller to physically be present for the note closing with the use of overnight delivery and wire transfers.

The fee for outside closings average $200 – $400 and can be paid by either party or split equally. Any legitimate note buyer should be willing to participate in an outside closing through a licensed and bonded closing agent.

Outside closings offer protection and peace of mind to both sellers and investors when selling mortgage notes.

Wondering just how much your mortgage note is worth? (Learn the Value of Your Mortgage Note)

The value of a note or contract is affected by many factors including the:

Down Payment

Terms of the Note

Buyer’s Credit Rating and Payment History

Type of Property Sold and Its Current Value

Since each transaction is unique, we offer a free note analysis based on your individual situation.

Fortunately it is easy to obtain a free evaluation in 3 easy steps:

Step 1 – Gather Copies of Documents

The first step is to gather copies of the documents. The primary documents utilized in the quoting process are:

Settlement Statement

Mortgage (Deed of Trust, Real Estate Contract etc)

Promissory Note, and

Payment Record

Hopefully copies are easily accessible with the originals located in a safe deposit box or other secure location for safekeeping. If a seller later decides to sell the payments then the investor will ask for a few other documents plus the appropriate originals at closing. But for now these copies will be reviewed for an accurate quote.

Step 2 – Complete the Quote Request Worksheet

The Quote Request Worksheet, also known as a Mortgage Submission Worksheet, is a simple single page form. This worksheet summarizes the transaction with most of the information obtained from the document copies. It includes details on the property type, buyer, repayment terms, and current balance. (Please visit the Quote Request and Free Note Analysis page to print a PDF version of the worksheet or to submit online).

Step 3 – Send for Review

The third step is to submit the worksheet and the document copies to an investor for pricing. Depending on the investor this might be submitted via email, fax transmittal, or an online submission process.

Most note buyers will provide a free no obligation quote within 48-72 hours. The quote is generally good for 30 days and is subject to due diligence, which includes review of the title, appraisal, insurance, buyer’s credit, and other underwriting items. The more information an investor has up front the fewer “subject to” items they will include with the evaluation.

Want freedom from collecting payments for the next 10, 20, or even 30 years?

Prefer a lump sum of cash today?

If you sold property with seller financing chances are you’ve wondered about selling the real estate note. Here’s how to sell a mortgage note, trust deed, or contract in 7 easy steps.

Step #1 Request a Quote

– Just complete a short informational worksheet to receive a free no obligation quote. This can be submitted online, by fax, or over the phone.

Step #2 Provide Document Copies

– To get started note buyers like to see copies of these three documents:

Settlement Statement

Promissory Note

Mortgage, Trust Deed, or Contract

It is also a good time to be sure you know where the originals are located, especially the Promissory Note, as they will be requested at closing.

Step #3 Accept Offer & Agreement

– Once an offer is accepted it will be outlined in a written agreement. In addition to stating the price, the agreement will specify conditions of closing and who pays costs.

Step #4 Note Buyer Review

– The mortgage note buyer will perform a detailed review of the transaction, known as due diligence. This includes a review of the buyer’s credit, current tax and insurance status, payer interview, and other important items. They may also request copies of additional documents including a payment history, insurance policy, and existing title report.

Step #5 Appraisal

– The note investor will order an evaluation of the current property value. This usually takes the form of a Broker’s Price Opinion (BPO) or Drive-by Appraisal. The investor wants to be sure the property value is still equal to or greater than the sales price. If the value comes in low, the note investor may present a revised offer for consideration.

Step #6 Title Search

– The title search verifies ownership of the property and the mortgage note. It saves time and money to work with any title report that might exist from the original sale date. If the title search shows money is still owed on a prior mortgage it will usually be paid from proceeds.

Step #7 Closing

– When all steps are complete the note buyer will send the final closing documents for signature. The title company is often used to handle the exchange of money for the original note and transfer documents. Funds are typically paid in the form of a wire transfer or cashier’s check. You are also encouraged to have your attorney review and advise with the closing process.

We are Here to Help!

Selling your mortgage note can be a simple process when you work with an experienced note buyer. Just take a few minutes upfront to gather your information and documents and we will handle the rest for you!